Federal and state regulators are turning up the heat on

J.W. Seligman

, which last month revealed it had permitted some customers to market-time shares of its mutual funds.

Seligman, a 140-year-old investment advisory firm, said in a recent regulatory filing that the

Securities and Exchange Commission

and New York Attorney General Eliot Spitzer are "reviewing'' several market-timing arrangements the firm had with its customers.

The firm also said it has provided information to Massachusetts securities regulators in an investigation of an "unaffiliated third party." A source said the Massachusetts request, which was made last year, was for information about any trades made by a group of

Prudential Securities

brokers in Boston who since have been charged with civil fraud.

Meanwhile, in the fast-growing mutual fund investigation, Massachusetts regulators on Wednesday filed a civil suit against

Franklin Resources

(BEN) - Get Report

, charging the parent company of the Franklin/Templeton funds with fraud in a market-timing scheme involving Las Vegas investor Dan Calugar. In December, the SEC charged Calugar and his

Security Brokerage

outfit with generating $175 million in profits from market-timing shares of

Alliance Capital

(AC) - Get Report

and

Massachussetts Financial Services

.

And on Thursday, Spitzer and the SEC are expected to announce long-anticipated settlement with MFS over allegations that it allowed hedge funds and investors like Calugar to market-time shares of 11 of its mutual funds. The division of

Sun Life Financial

(SLF) - Get Report

is expected to pay a $225 million fine and slash its mutual fund fees by $125 million.

Last month, Seligman said its internal investigation had found that it too had allowed customers to market-time its funds' shares. The firm said its internal inquiry found four such arrangements, although all of them ended months ago. Seligman also disclosed that one employee had left the firm following the investigation, but it didn't offer an explanation for the employees' departure.

Market-timing is the term for a legal but frowned-upon trading strategy in which mutual fund shares are bought and sold frequently in order to profit from price differences in different markets. It's harmful for the vast majority of mutual fund investors because it can dilute the value of a fund by driving up trading and administrative costs.

Most fund companies say they try to ferret out and stop market-timers. But investigators looking into improper trading practices in the $7 trillion mutual fund industry have found that many fund companies were willing to bend or ignore those rules when it came to a privileged group of hedge funds and their brokers.

A Seligman spokesman said the investigation was prompted by the company's "voluntary public disclosure." Officials with Spitzer's office and the SEC also declined to comment. But a person familiar with the investigation said Spitzer's office two weeks ago asked Seligman officials to turn over documents.

Several people familiar with the Seligman funds said that prior to 2002, several of the firm's technology funds were a ripe target for market-timers.

Those same sources also said the Seligman funds were frequently market-timed by Michael Sassano, the

Oppenheimer & Co.

(OPY) - Get Report

broker said by regulators and security industry sources to be a central figure in the mutual fund market-timing investigation. Sassano, who earned between $10 million and $15 million in annual gross commissions, was a top-performing broker at

Canadian Imperial Bank of Commerce

(BCM) - Get Report

before it sold off its Oppenheimer brokerage division in early 2002.

One of Sassano's many hedge fund customers said the Seligman technology funds were known as "hot" funds for market-timers. After 2001, the source said, the Seligman funds became a less-appealing target.

Hank Greene, a Seligman spokesman, declined to comment on whether the firm was aware Sassano had made market-timing trades in the company's funds. But he said Seligman never had any arrangement with Sassano to permit him to market-time its funds.

Greene also declined to comment about the former Seligman employee who left the firm in the wake of the company's internal investigation. He said the company does not discuss personnel matters.

Brokerage records, however, reveal that Seligman allowed one of its mutual fund salesmen to resign in December, after noting that the employee may have committed a "potential violation" of an NASD rule that regulates the sale of mutual funds. The regulation is called the "antireciprocal rule," and it's meant to eliminate conflicts of interest in the sale of mutual funds.

The rule, for instance, prohibits brokerage firms from favoring the sale of certain mutual funds in return for a fund company's promise to trade stocks through that brokerage. The rule recently tripped up

Morgan Stanley

( MWD), which paid a $50 million fine to the SEC to settle allegations that its brokers had hidden incentives to favor the sale of some mutual funds over others.

In a regulatory filing, Seligman said its internal review found potential problems with its long-stated policy of sending trades to "brokerage firms in recognition of their sales of the Seligman funds." The filing said some of Seligman's compensation arrangements with those brokers may have "violated applicable requirements for certain such orders."